Pakistan Reader# 187, 27 August 2021
A booster shot of liquidity in pandemic times
Ankit SinghPakistan’s central bank last week received an additional USD 2.75 billion in its Special Drawing Rights (SDR) allocation through an announcement by the International Monetary Fund (IMF) on August 2, to allocate USD 650 billion in the general quota for the member countries. “The largest allocation in history … is a significant shot in the arm for the world,” IMF Managing Director Kristalina Georgieva said in a statement issued in Washington. “If used wisely, (this is) a unique opportunity to combat this unprecedented crisis.”
Is it good news for Pakistan?
SDR is a subset of foreign exchange reserve, a method provided by IMF utilized mostly by developing economies comprised of major free-floating currencies. The additional tranche will facilitate the central bank, The State Bank of Pakistan (SBP), in managing the micro indicators like policy rate, credit rate etc. With this allocation in the forex reserves of Pakistan have reached record high of USD 27.4 billion. SDRs can be used in various ways from usable currencies among members to loan repayments and payment obligations. The SDRs lie with the central bank and can’t be used to finance commerce related activities, so forex reserves may have peaked but not all is well with the health of the economy in Pakistan.
Is there any dampener along with additional SDRs?
The Pakistan Rupee had been depreciating since May 2021, recently USD 1 was pegged at PKR 165, this shows that confidence in the domestic currency is not on a positive trajectory, hot money in terms of foreign direct investors and foreign portfolio investors has been on a flight from Pakistan. Currency depreciation has direct impact on imported petroleum products and liquified natural gas (LNG) which is pegged in Dollars. This in turn has direct impact on inflation because of large products derivative from petroleum usage. This leads to higher current account deficit due to expensive imports over meagre exports of Pakistan. However, the SBP governor has maintained an optimistic stance in short term and has maintained that economy will rebound in 2022-23.
What is the optimism about?
The government has affirmed that incentives provided in 2021 budget for domestic production will fructify soon as higher imports reflects consumption and increased economic activity, imports of heavy machinery will give better outputs in the long term. Also, the increased forex reserve may help the economy and the country in keep floating over debt crises. The interesting part is that the export profile has not diversified yet the economic technocrats have the courage to predict for positive signs in economic revival.
References
Anwar Iqbal, "IMF's historic funding takes effect", Dawn, 24 August 2021
Department of Economic and Social Affairs,Statistics Division, "2019 International Trade Statistics Yearbook", United Nations, 2020
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